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Announcement:

Moody's upgrades Bank of Ireland BFSR to D+, outlook stable

08 Sep 2010

Outlook on ICS Building Society changed to negative

London, 08 September 2010 -- Moody's Investors Service today upgraded the bank financial strength rating (BFSR) of Bank of Ireland to D+ from D. The D+ maps to Baa3 on the long-term scale and the D mapped to Ba2. The outlook on the BFSR is stable. The other ratings of the bank, including the A1 (stable) / Prime-1 bank deposit and senior debt ratings, are affirmed.

The BFSR of ICS Building Society was also upgraded to D+ (mapping to Baa3 on the long-term scale) from D/Ba2, in line with that of its parent. The outlook on the A2 long-term bank deposit rating of the society was changed to negative.

These changes conclude the review on the two institution's BFSR's initiated on March 31, 2010.

RATIONALE FOR UPGRADE OF THE BFSR OF BANK OF IRELAND

Ross Abercromby, Vice President and Senior Analyst for Bank of Ireland at Moody's, commented: "Throughout this year there has been a substantial improvement in the creditworthiness of Bank of Ireland as a result of a number of factors. These include the raising of EUR2.94 billion of equity capital, the transfer of two tranches of loans to the National Asset Management Agency (NAMA) at an average discount of 35% - which has been the lowest among the rated Irish banks -, and the approval by the European Commission of the bank's restructuring plan".

He continued: "We assume that the the remaining assets that are to be acquired by NAMA will have a similar discount to those already transferred. This -- together with the impairment of the remaining assets -- is sufficiently covered in our base scenario by the successful capital increase. Some vulnerability remains to our stress scenario, which is reflected in the D+ BFSR." With regards to the assets that are not transferred to NAMA, Moody's also noted that early indications suggest the impairment charge on these may have peaked (EUR893 million in the first half of 2010, compared to EUR1.417 billion in the second half of 2009). However Moody's still considers that the profitability of Bank of Ireland will remain pressured from elevated impairments over 2010 -- 2012 on the non-NAMA assets. The pressure is likely to come from the large residential mortgage book in Ireland as unemployment remains high, and from the business banking sector in Ireland that is likely to remain challenged as a result of the substantial fall in economic activity.

Beyond the removal of toxic real estate exposure, the NAMA process is improving the credit profile of the bank in two further ways: (i) it is helping to reduce single-name concentrations (that were already lower than Irish peers), and (ii) it helps to improve the liquidity profile as the removal of the loans reduces the bank's funding, and the transferred loans are acquired by NAMA with Irish government guaranteed bonds that are pledgeable at the ECB.

Furthermore, the rating agency said that the recent capital raising of the bank has greatly improved the quality of the capital base. The capital was raised through a variety of means including a placement to new international investors, a debt to equity swap (on certain tier 1 and upper tier 2 securities), conversion of an element of the government's preference shares and a fully underwritten rights issue. Net of costs and the buying-out of warrants that were attached to the government preference shares the bank raised EUR2.94 billion of equity, which went beyond the required EUR 2.66 billion required by the Irish regulator. Following this process the Irish government now owns 36% of the bank and at end-June 2010 the core Tier 1 ratio was 10.2%, up from 8.9% at end-2009.

In addition to the ongoing burden stemming from the impairment of the non-NAMA assets, the D+ BFSR also incorporates other challenges facing the bank such as (i) the wind-down of the large portfolio of non-core assets of which the largest part is the UK intermediary distributed mortgage book (EUR30 billion at end-June 2010) and, along with that, a reduction in the bank's relatively high utilisation of wholesale funding; (ii) the sale of businesses due to European Commission requirements in return for approval of the state aid; and (iii) the risk of a further downturn in the economies of Ireland and the UK.

RATIONALE FOR STABLE OUTLOOK ON THE BFSR OF BANK OF IRELAND

"Moody's is of the opinion that the measures taken by Bank of Ireland to restructure the bank and to reduce the risk profile, mean that its standalone credit strength is well captured at the D+ standalone rating level with limited downside risks and this supports the stable outlook", said Abercromby. "At the same time, we do not expect further upward pressure on the rating until the bank has been able to progress significantly in its restructuring process, including the completion of the NAMA process; and until it has established a track record of unguaranteed debt issuance as we note that in the current market environment access to capital markets remains difficult for any Irish bank. Further evidence that impairment charges on the non-NAMA assets are falling would also be important as an indicator" Abercromby added.

NO IMPACT ON DEPOSIT AND SENIOR DEBT RATINGS

Importantly for the bank deposit and senior debt ratings of Bank of Ireland the Irish government continues to be extremely supportive and this is the key factor in the high levels of uplift incorporated into the A1 senior rating of the bank. Given that the Irish government now owns 36% of the bank and that Bank of Ireland's strong Irish franchise has been relatively unaffected we expect government support to remain very high.

Moody's noted that coupon payments on the banks tier 1 and junior subordinated securities are expected to be resumed in 2011. If this were to happen then this could lead to upward pressure on these ratings; currently the bank's junior subordinated debt is rated Ba3, the cumulative preference shares B1 and the non-cumulative preference shares Caa1.

ICS BUILDING SOCIETY RATING ACTIONS

The BFSR of ICS Building Society has also been upgraded to D+ (BCA: Baa3) reflecting how highly integrated it is into Bank of Ireland (its funding requirements [over and above its deposit base], liquidity management and market risk management are all centralised in BoI), and indeed it is managed as a part of the retail operations of Bank of Ireland. However ICS Building Society needs to be sold following the negotiations with the European Commission. The bank has a multi-year period in which to sell ICS, but this will require a substantial restructuring because as well as providing a servicing capability to its parent for the Irish mortgage book, Bank of Ireland is only required to sell a minimum of EUR2 billion of loans as well as deposits that at end-2009 totalled EUR4.4 billion. The change in outlook to negative reflects that, in Moody's opinion, any sale is likely to be to a lower rated domestic entity given the small scale of ICS Building Society.

RATING METHODOLOGIES APPLIED

The principal methodologies used in rating these issuers are Moody's "Bank Financial Strength Ratings: Global Methodology", published in February 2007, "Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology", published in March 2007, and "Moody's Guidelines for Rating Bank Hybrid Securities and Subordinated Debt", published in November 2009, which are available on www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating these issuers can also be found in the Rating Methodologies sub-directory on Moody's website.

PREVIOUS RATING ACTIONS

The last rating actions on Bank of Ireland and on ICS Building Society were on March 31, 2010, when the D bank financial strength rating of both institutions were placed on review for possible upgrade. In addition on July 21, 2010, the government guaranteed long-term debt of Bank of Ireland was downgraded to Aa2 (stable outlook) from Aa1 (negative outlook).

Bank of Ireland is headquartered in Dublin, Ireland and at end-June 2010 reported total assets of EUR180.4 billion. ICS Building Society is headquartered in Dublin, Ireland and at end-2009 reported total assets of EUR13.6 billion.

London
Johannes Wassenberg
MD - Banking
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Ross Abercromby
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom

Moody's upgrades Bank of Ireland BFSR to D+, outlook stable
No Related Data.
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